Wednesday, August 15, 2012

Income. It is taxable. The sooner you get your small-business ducks in a row, the better.

Self-publishers especially have to do the right steps in the right order, or your publishing dreams will stall.

I've consistently heard one piece of advice I'll share again: create a financial infrastructure separate from your personal finances. Register yourself as a sole proprietor/independent contractor. Get a bank account for your writing. This will make tax time tons easier.

It will also help ensure you pay the right taxes on time and avoid getting smacked with fines and fees, or being charged with tax evasion. You can't wait until next April to pay 2012 taxes on writing income, unless it's under a certain threshold (I believe $250 or under can be paid annually). Most taxing entities want you to pay tax on income quarterly at the minimum (some want it monthly) and will punish you if you don't. This is one of those places where "ignorance of the law does not excuse you."

Publishing with an ebook publisher or print-on-demand service, you will need to set up an account with them.

To do that, you need your bank account set up.

To do that, you might need a business license from your local municipality.

To do that, you might need to register your business with the state.

To do that, you WILL need to register for an EIN (employer identification number) from the federal government.

To do that, you will need to decide what kind of business entity you will be. If sole proprietor doing business under your own name, there's no special step here, other than to simply decide this. If you plan to set up your own press or publish under a pseudonym, you must register the name with your state. In Pennsylvania, the fee is $70 for a "doing business as" (DBA) license.

So, to put that in the correct order, do the following:

1. Chose your entity type-- as yourself or pick a business name. Research that the name isn't already registered.

2. Apply for your DBA license. (Skip if using your own name.) How long this process takes varies from state to state, as does the fee.

3. Register with the federal government for your EIN. You'll need an approved DBA name to do this. It is FREE and can be done online, with instant results.

5. Register and/or obtain a license with your local municipality. Urban areas in particular are keen to collect business taxes. You will need your approved DBA, your EIN and your state ID number to do this. My municipality offers a lifetime or annual fee. I plan to do the smaller, annual fee until I have book income coming in.

6. Open a business bank account. You will need ALL OF THE ABOVE to do this. Most banks offer a variety of business accounts. Choose one that allows enough transactions that you won't have your income eaten away by bank fees. Keep track of how much "seed money" you initially invest to cover expenses before you begin bringing in income.

7. Set up a PayPal account for your business. You will need the business bank account to do this. This will enable you to sell autographed copies from your own site, for example. It also makes it easy to pay out-of-state vendors, such as a freelance editor.

8. Set up your royalty payment account with your service providers, be that the print-on-demand publisher, Smashwords, Amazon and other channels. Traditionally published would skip this step.

9. Pay your business expenses from your business bank account (you'll need to begin with seed money you invest). Keep receipts for everything. If you work from home, hang on to your utility bills for the year also. A portion of those are deductible. A tax professional can help you calculate how much.

10. Map out your tax-paying schedule and pay taxes on time, again, from your business bank account. Track your tax payments. Some state and local taxes paid can be deducted from your federal 1040. License fees definitely can be.

I procrastinated a bit on step five and realized I might have to schlep to City Hall to speed the process along. It's worth the hassle, especially since I can't move ahead with uploading the book until I can get paid, which, as you can see, is a few steps past step 5. :-)

On a personal note...
Those who follow me on Facebook heard about my husband's bike accident. Someone opened a car door into him and he flipped over the door. Miraculously his injuries were not catastrophic--severe whiplash, a sprained finger, five stitches for one deep gash, and lots of bruising. No broken bones at all. I'm home this week taking care of him and learning ebook formatting, plus the small business hoop-jumping. He's steadily getting more mobility and starts physical therapy for his neck soon. I'm hopeful that in another week, he'll be able to turn his head enough to drive again.

What part of this process surprised you? Which steps seem easiest or hardest?

Yeah, he will be huring for a long time, I suspect. It has taken about four days for him to be able to sleep in a bed instead of the recliner. It hurt to much to get up from laying down with the whiplash.

Thanks for your prayers for Joel. He's trying to wean off the heavier pain meds today and not feeling so good.

Traditionally published need to do most of this too. In my local municipality, royalties are treated like self-employment income, thus you have to be registered as a sole proprietor, and to do that, you have to be registered also with the feds and state.

For me the hardest decision was whether to pay for the DBA license. One of my crit partners went the LLC route, which sounded really complicated, but she plans to do loads of walks and talks with kids, so needed the liability protection.

My hubby was very blessed to not be more injured than he is. Tomorrow he starts physical therapy, which we hope will help him be able to drive again (hurts to check the mirrors when you have whiplash).

I went through all that last year too. The good thing is once it's done it's done. I did not go with an LLC but if you make into the thousands and thousands I know that it saves you money to then incorporate. So I did file for DBA but here it's only 50 dollars. I invested a certain amount into my business bank account and from here on in, I will only use that money for business.

So even if I feel like I'm making profit, technically I'm not until I've completely recouped my investment. I still need to figure out how that works with taxes.

I believe it's possible to convert from sole proprietor to another form, so it's a shift that one can make later. When it came to the DBA decision, I felt that $70 would pay off much more if put into, say, review copies or contests or some other marketing tool. With every expense, I ask myself "How many more copies do I have to sell to cover this? Will this expense enable me to do that better?"

Obviously you won't owe taxes if your expenses outweigh your income, and losses can be carried forward to offset some of next year's income too. A tax professional can explain it all to you. Or if you enjoy learning, try some adult ed classes--even if you end up hiring someone, it's good to have a basic idea of how the tax stuff works.

I tripped across a series of vlogs by Alison Moon when I googled "self publishing" and got the skinny on all the groundwork that needs to be laid before you bring in income from your writing. The vlogs are super helpful.

I had friends who got slapped with fines by my city government for not reporting income from the Amazon affiliate program (you earn a tiny fee if someone buys something you recommend). So now I'm hyper-vigilant about tax law and try to teach others to be the same.

Thank you for the step by step advice. I needed to read that. I knew I needed to do some of it . . but I had no idea about the quarterly taxes - should have, but didn't. I'm glad to hear that your husband's injuries are minor, and I hope he recoveres quickly.Blessings!

I'm in the unique position in my city of having to pay taxes on all income EVEN IF my business posts a loss for the year overall. Kinda wacky, but true. The city wanted to discourage shadow businesses that were a kind of tax shelter.

Many beginning self-publishers merely break even in the beginning or don't initially recoup costs until the next tax year. It's important to be reporting and if necessary paying as required though, so you never face penalties or late fees.

About Me

City dweller, word nerd, Indie film enthusiast and incurable Anglophile. Professor's wife and mom to an arty teen. Follower of the Good Shepherd, who is faithful when we are faithless. My poetry and fiction explore the places where heart and soul are tested and growing up truly begins.

I'm also a freelance editor who has been editing professionally since 1991. How can I help you make your manuscript shine? Click my "editing services" tab to learn more

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